Relatively self-explanatory, an interest-only mortgage is one where your entire mortgage payment goes to interest and does not pay down the principal mortgage amount at all. So at the end of your term, you will owe the same amount as when you got your mortgage.
So you might be asking yourself, what are the advantages? Well, an interest-only mortgage frees up your cash flow. As you’re not responsible for paying down the principal balance, you can expect a lower mortgage payment. The interest-only mortgage really shines as a management tool for rental properties, where cash-flow is king.
Here’s an example. On a $400k mortgage balance, over 25 years, at a 4% interest rate, the monthly repayment on an amortized mortgage would be roughly $1902/mth. However, as an interest-only mortgage, the payment is $1,321/mth, providing you with an extra $580 in monthly cash flow.
The money you save by not paying down the principal of your mortgage can be used however you like. It could be used to pay off higher-interest debts like credit cards, unsecured line of credits, or any other high-interest loans. If you have a fixed income, an interest-only mortgage can be used to offset the increased cost of maintaining your home through retirement.
Regardless of what you decide to do with the extra cash flow, the choice is yours. Now, while an interest-only mortgage is designed to give you increased flexibility, don’t be alarmed if that flexibility comes at a price. Interest rates for an interest-only mortgage are slightly higher than standard mortgage rates.
The advantage of working with an independent mortgage professional, compared to the bank, is that we have access to multiple lending solutions and mortgage products. The interest-only mortgage isn’t right for everyone, but it stands as an example of one of the many mortgage products you have available through a mortgage broker.
If you would like to discuss your financial situation and what mortgage products would be best for you, please contact me anytime!